The Facebook Deficit, an editorial in the Wall Street Journal, is an example of the problem with depending on the wealthy to finance the redistributionist state.
Who’s the biggest loser in the Facebook stock meltdown? Next to founder Mark Zuckerberg and IPO underwriter Morgan Stanley, it’s arguably California.
Governor Jerry Brown’s wing-and-a-prayer budget in January predicted the Facebook IPO would help to close the Golden State’s $9 billion deficit with a $2.5 billion tax windfall over five years. Mr. Zuckerberg alone was counted on to pay nearly $1 billion in capital-gains taxes. The hope in Sacramento was that the Facebook IPO would repeat the “Google surpluses” of the last decade after the search-engine giant went public and the state treasury landed a $7 billion jackpot.
Sorry, Jerry. Early this month the state’s Legislative Analyst’s Office reported that because of the near 50% decline in Facebook stock from its $38 a share offering price, “hundreds of millions of dollars of income tax revenue assumed in the state budget plan are at risk.” It’ll be even worse if other young tech companies don’t go public or do so at lower valuations. The Facebook falloff comes after state tax collections in the first half of 2012 had already fallen $3.5 billion below earlier estimates.
The risk of a progressive tax structure that depends on the wealthy to finance more and more government spending is that while rich individuals may be able withstand the volatility of markets, it is quite different to expect the state or federal treasure to adapt to such unforeseeable market swings. Recessions, which are the very times that government social spending increases, are the same times that income for the wealthy and the resultant tax revenue decline the most. We would have a far more stable fiscal policy if the tax burden was less progressive. Few corporate developments have the size and impact of a Facebook or a Google, but the accumulated effect of thousands of much smaller businesses whose growth is stunted by stifling laws, regulations, uncertainty and misguided fiscal policy has an effect that is far larger even if less immediately visible.
The vast hypocrisy of governments that demonize the wealthy, the business owners and the corporations while depending on them more and more to finance their social spending is not only morally repugnant; it is functionally doom to fail. Note the previous post Can Capitalism and Democratic Socialism Coexist? We may be staring at the answer.